When we think about the influence of the environment on decisions, we can think
that perhaps the environment will be like waves.
That it will get people to decide one thing one way, another thing another way,
and so on, and things would move and switch, and so on.
Or we can think to ourselves that maybe what would happen is that once we make a
certain decision, that decision will stick with us.
And would disproportionately influence our future decisions.
Now I want us to think about what is the role of our first decision in the category
on our future decisions in that category. So I want you to think about the following
case. How should people decide about buying
coffee? What is the rational model that tells us
how we should decide if to buy coffee or not?
And the rational model is very simple. You have evaluation, how much you think
you would get from this coffee? What kind of pleasure you expect to get
from this coffee? And if the pleasure is high you would pay
more, if it's low you would pay less. And for each amount of pleasure, you have
an associate amount of money. So you say, how much pleasure do I expect
to get from this cup of coffee? You say huh, $2.40.
If they charge me more, I will not pay. If they charge me less, I would pay.
This is the standard rational model of saying what is the, how much are we
willing to pay for coffee. Now, that's a model that says that we
actually know how to evaluate coffee. Instead, I want to propose something we
call self herding model. And the self herding model is the model
that says that we're influenced by our past decisions as we make future
decisions. So, first of all, let's think about,
what's herding? Herding is the idea that we follow other
people. For example, imagine that you walk down
the street, and you see two empty restaurants.
You don't know which one to choose. You don't know anything about them.
You pick one. Somebody else comes after you.
They also know nothing. But they see one restaurant with one
person, and one restaurant with zero. What do they do?
They follow the herd. They go to the restaurant with one person.
Somebody else comes. They see a restaurant with two, they
follow that. Another person comes, they see three, and
so on. Eventually, one restaurant is a big hit.
One is a complete failure with no information just because people tend to
follow other people. Here's another example.
Sometimes there are fires in clubs or other places that have lots of people.
And what happened in all of those cases almost all of them, is that there
sometimes exits where people just run over each other and kill each other as they try
to escape. And other exits, nobody, nobody tried to
escape. And you can think to yourself, what will
happen? Imagine that you're in a big room with
lots of people. And all of a sudden, there are fire
alarms, and everybody's running in a certain direction.
Are you going to stop? Are you going to say, hey, let me stop,
and let me see what people are doing. Maybe there's something that everybody
else is missing. Or you're willing to be inclined to try to
run after them and follow the herd? Most likely you're going to try to follow
the herd. The instinct is just incredibly strong.
So what is self-herding? Self-herding is like herding but its
herding that we follow ourselves. You make one decision and you remember
what decision you make. And therefore you like it to follow it and
follow it and follow it, and let me kind of explain to you how this might look like
in coffee. So imagine that it is 14 years ago or 15
years ago and you live in Boston. And every day, you get up in the morning
and you go to the office, and on the way you stop at Dunkin' Donuts which is a
simple coffee shop, and you buy a cup of coffee for $0.40.
And you go to the office and you're very happy.
And you're used to that. And one day, it's 4 o'clock in the
afternoon. You're thirsty, you're tired, you need
coffee, and you also need to run some errand.
You are going to run some errand, you really feel like coffee, and you see this
new coffee place. Let's say it's Starbucks.
And you have never seen Starbucks before and you know nothing about them, but you
really thirsty and you are tired and you are a little aggravated and you walk into
Starbucks. And you can't believe how much coffee
costs. You've been paying $0.40 up to now and you
can't even imagine that coffee could cost all of a sudden 2.50 and 3.50.
But you know what, you're there already, you, you're really dying for coffee, and
you don't feel like walking four more blocks.
So you're buying coffee there. You go out, you go for your errands.
Three days later, you pass by this same corner again.
What do you remember about your past decisions?
Do you remember why you did it? Do you remember your emotional states?
Do you remember how much in a hurry you were, how much of a need of caffeine you
need, how much, how aggravated you were? Of course not.
Three days ago at 4 o'clock in the afternoon, how did you feel?
Do any of you remember? Of course not.
We have very bad memory for emotional states, but we do remember our actions.
So in the same way you said to yourself, I don't remember why, but I remember that
the past me from three days ago stood here and made this decision to go into
Starbucks. Therefore, it must be a fantastic
decision. I always make fantastic decisions.
Let me do it again. And then you do it again, and again, and
again, and again. And after a while, you stop thinking about
whether this was the right decision or not.
You assume, in the same way that when you have a long line of people, you assume
that they know something. When you have a long line of you making
the same decisions in the past, you assume that this was the right, the right
decision. Now, here's an experiment to get us to
think about this, about how the role of the first decision influence later
decision. So I've done this many times, I come to a
big group of people. And I say, here are some products, for
example. A trackball, a keyboard a cheap wine, an
expensive wine, design book, and some Belgium chocolates.
In experiments, we don't tell people how much the wine cost.
We just describe the wine, the wine from wine specter and wine magazine, and so on.
And we pass the products around. So that everybody can look at them.
And examine them, and so on. And then we say, okay, now that you know
all the products, here's a list, here's a piece of paper with all the products.
And at the top, we ask you to put the last two digits of your social security number,
of your national ID number. And everybody puts the number, in my case
it would be 79. People write these numbers.
And then we say, please take that number and make it into a dollar amount.
So, in my case, it would be $79. And write that amount in dollars next to
each of those items. So people have numbers that end up in high
numbers, will write high numbers, people that have numbers that end up in low
numbers would write low numbers. And then we say, hypothetically, would you
pay this amount in dollars for each of those products?
And people say yes or no, yes or no, hypothetically.
And then we say, and now, please submit a real bid.
We're going to have an auction, we'll find the highest bidders, they'll pay, they'll
get the products for real, but submit your real bids.
People submit their real bids. We find out who is the highest bidder.
They pay. We give them the product.
And we also ask people, we say, do you think that your social security number,
these random two digits, had any influence?
And people say, of course not. But when we look at the results.
We find that they had a real big influence.
And here's, kind of, an example from one experiment.
When we look at people who had social security numbers below 50, these are the
average prices they paid. When we look at people that have ending
numbers bel-, above 50, these are the numbers they had, and this is the
difference in percentages. You see, it's quite, quite amazing.
Now, do people who give you Social Security numbers know that you're going to
be willing to spend a lot of money or spend very little money?
Of course not. What happens is at the moment we get
people to consider a number, that number stays in their mind.
It doesn't have to be social security number.
It could be the weather. It could be shoes.
It could be whatever. In fact, the more random it is, the better
it is for the experiment. But the moment you consider a number, that
number stays with you. So, for example, you might say to
yourself, hm, $79 for a bottle of wine. No, that's too expensive, but maybe I'll
pay 50. And somebody that started with the number
12 maybe said, 12 for a bottle of wine? Yes, I will do it, for sure.
How much more would I pay? Well, maybe I'll pay 21.
So basically, people start with their starting point, even if it's random, and
stay to, close to that. Now, I should said that there was another
interesting pattern of the data. Even though we could take each product and
move it up and move it down, kind of arbitrarily based on social security
number. And the relationship between them were
quite good. So, for example, everybody was willing to
pay more for the expensive wine than the cheap wine.
We couldn't switch that. Everybody was willing to pay more for the
keyboard than the trackball. Once you pick a specific product, other
products in the same category follow a particular trend and remains in a relative
good position. But you can switch everything up and down
quite, quite easily. And this is all about the role of the
first decision. It suggests that once we make a first
decision, we remember that decision, and that decision becomes, we call it an
anchor, a starting point for our future decision.
This, of course brings to mind that famous story from Tom Sawyer and Mark Twain.
And if you remember the story, the story is that Tom Sawyer escaped from school and
went to the river. And Aunt Polly caught him, and Aunt Polly
banished him to whitewash the fence. And here it is, it's Sunday and Tom Sawyer
is whitewashing the fence. And his friend Billy the Steam is coming
down from the hill and he's saying, poor Tom Sawyer.
You have to spend Sunday whitewashing the fence and I am going to go to the river.
And Tom Sawyer doesn't move. He continues to whitewash the fence.
And then Billy the Steam continues to make fun of him.
And Tom Sawyer turns around to him and says, What do you mean, 'poor Tom Sawyer'?
It's not every day that a kid gets to paint a fence.
And Billy the Steam says, oh, you know, that's kind of interesting.
Can I try? And Tom Sawyer said, well, not so fast.
Aunt Polly's particular about who she lets and who she doesn't let paint the fence.
It's kind of a special privilege, not everybody can do it.
And then Billy the Steam says, what if I give you my apple?
And Tom Sawyer says yeah, for that, that seems like a good deal.
And he lets him whitewash the fence for an apple, and more and more friends come in
and more and more of them are giving Tom great treasures and all kinds of things.
And Tom Sawyer reflects on the day. And he reflects on the fact that life is
not that bad after all. And there's all kinds of things that you
could you could do better. But what Tom Sawyer and Mark Twain suggest
in this particular story, is that it's not only that we can make something better and
something worse. We can actually make something from being
positive from being negative. Is white washing the fence an adventure,
and something good that you should be willing to pay for it?
Or it's something negative that you should be paid for doing so.
Now, this of course, all kind of interesting things in the market.
There are for example. And people who go to prison to spend the
night like in a hotel and they pay a lot of money for it.
And there are vacations that you go to work.
Where you go to become a farmer or you go to squash wine or pick fruit or all kinds
of things. There's all kinds of things that can
become from pleasure to work. And it's, it's not really clear.
Now, we tried this version of Tom Sawyer. We tried to see whether there was
something we could move from being pleasurable to displeasurable and the
other way around. And we choose to think of my ability to
recite poetry. So, so I came to a group of students.
And I recited them a particular piece of poetry from Walt Whitman's Leaves of
Grass. [music].
Whoever you are, holding me now in hand. Without one thing, all will be useless.
I gave you fair warning, before you attempt me further.
I am not what you suppose, but far different.
Who is he that would become my follower? Who would sign himself as a candidate for
my affection. The way, suspicious.
The result, uncertain, perhaps destructive.
You will have to give up all else. I alone will expect to be your sole and
exclusive. And after reciting the little bit of
poetry, I said you know what? On Friday, I'm going to have a poetry
recital. And I'm going to have three poetry
recital, short, middle length, and long one.
And then I said look, I don't have space for all of you, this was a very big class,
I only have space for a few. So I'm going to have an auction procedure
for you to decide who would get into the recital and who would not.
And I gave people a sheet of paper to submit their bids.
But for some people I said in the beginning, before you start, tell me
hypothetically whether you would be willing to pay $10 to listen to Professor
Riales recite poetry for five minutes. And they, they said yes or no, and then
they said how much they would pay for the short, medium and long recital.
To other people, it was the same thing, but we said hypothetically, before we
start, tell me whether you would be willing to listen to Professor Rielli
recite poetry for five minutes if we paid you $10.
What happened? The people who we asked them about willing
to pay, paying $10, were willing to pay. The people we asked them about we paying
them, wanted to listen only if we pay them.
So what happened is that people don't know if me reciting poetry is good or bad, and
we can change their understanding based on the first question.
And what about longer poetry reading? They just went in the same direction.
So if somebody thought about it in the negative direction, that they should be
paid, then they thought they should be paid for longer poetry reading more.
And if somebody thought it was positive, they're willing to pay more for long po-,
poetry readings. So the fact is that people don't know, for
example here, if this is good or bad. But once they decide, everything becomes
coherent, everything becomes sensible within that, within that range.
Now, let's go back to Starbucks and Dunkin' Donuts.
Because if you think about first decision influence later decisions, you could ask,
how come Dunkin' Donuts did not influence Starbucks' decisions?
If we had decisions about coffee, why isn't my first decision about coffee at
$0.40 influencing my later willing to pay for coffee at Starbucks?
And it, the point here is that Starbucks did lots of things to get us not to think
about Starbucks and Dunkin' Donuts as decisions in the same category.
Think about it. When you go to restaurants and you look at
the menu, do you compare things across categories?
For example, have you ever looked at the wine menu and said, my goodness, for the
difference in price between these two bottles of wine, I can get four gallons of
milk? Of course you don't, you don't think about
other categories. We compare appetizers to appetizers, and
main dishes to main dishes. Desserts to desserts, wine to wine, beer
to beer. We don't compare even within the menu.
And what Starbucks wanted to ensure. Is that we don't compare Starbucks coffee
to Dunkin Donuts coffee. And how do they do it?
By all kinds of superficial by, important things.
First of all, they did not start by selling donuts and cookies and muffins.
Imagine the following case. Imagine that Starbucks started and they
created stores that were just like Dunkin' Donuts.
The same design. They sold everything, only the coffee was
better quality. How much more would you be willing to pay
for coffee under those conditions? If you could contrast them directly and
compare them, I'm betting that you would not be willing to pay much more for that
coffee. But they basically wanted to separate the
decision as if it's wine and milk. So they told this about single-bean
coffee. And they told us about they sold us French
presses. And there were no donuts and there were no
doughnut holes and there were no muffins. There were only french and Italian
pastries. And you couldn't ask for a small coffee.
If you asked for a small coffee they would say, excuse me, I have no idea what you're
talking about. We have all these other things,
mochaccino, frappuccino. And we, we only have macchiatos and croissants and
biscotti, and so on. And because of that, because of all of
these superficial things. We did not compare the two directly.
And we were willing to treat Starbucks as a new category of decision.
And accept whatever price. They were offering to us.
Now, many years later, the decision to spend more money on coffee, and the
decision to go into Starbucks is already automatic.
Now, we don't need to think about it. It's something we just do without
thinking. And because of that, now Starbucks can
change. Starbucks can start selling us muffins and
cookies, and even donuts. Something they couldn't have done in the
beginning because of the separation they can now do because we don't think about
the decision so much. This by the way also resonated very well
with what Conrad Lawrence showed many years ago.
Conrad Lawrence was an amazing researcher and he showed that if.
Ducklings hatch what they do is they look at the first figure in front of them and
start following it. And in fact for many of them Conrad
Lawrence was that figure. He was just waiting for the ducklings to
hatch they observed him and then they kept on following him.
Its a really good analogy for how we think about the first decision.
Its imprinted on us. And then we're just making the same
decision over and over without thinking very much about it.
There's couples of ways to think about how this idea of initial pricing influancing
later pricing, and influnce us in the recent activities in the world.
So think for example about the first iPhone.
When the first iPhone was introduced in the US.
It was introduced at $600. And very quickly, Apple said, sorry,
sorry, sorry, it's only $400. Was this a good pricing strategy or a bad
pricing strategy? When I talked to the people at Apple, they
said, of course, it was a brilliant strategy.
But let's think to ourself about what do we think about this.
So imagine two universes. In one of them, the first iPhone is
introduced at $400 and the other one is introduced at $600.
And then very, very quickly, they said no, no, sorry, sorry, sorry; it's only $400.
In which of those two universes would you be more likely to buy the iPhone at $400?
Here's the thing, as a consumer, you have this new device.
And you have to figure out how much it's worth.
Is it $20? Is it $200?
Is it $600? How much is it worth to you?
Very hard to figure out. So now, think about it.
What happens in these two universes? If it's $400, you have to really figure
out how much it's worth to you. But if it went down from 600 to 400.
Now, all of a sudden, you could do a relative comparison.
And even though the $600 is no longer available, as long as it's available in
your memory, the contrast is still there. And now, you say to yourself, it's two of,
2 3rds of the price. Clearly a good deal, now creating a much
better version. It looks much more appealing.
So when you do relative prices, relative prices can be to things that are existing
in the market. But they could also be to phantom
products, things that used to be existed in the market or exist only in your
memory. Now, later on in the U.S.
Apple decreased the price of the iPhone even further, and rolled the extra price
in to the monthly fee to the cell phone companies.
And then what happened? Then they introduce the big iPhone, the
iPad. Now, what happens?
You have the same device without the phone and only bigger.
You have the same screen, only bigger. How much can you charge for it?
Well, how much you can charge for the iPad has very little to do with the actual
value that it's giving. And a lot to do with the relative size and
the relative price. Whatever you price the iPhone, the iPad
kind of tracks. Not exactly per square inch, but it tracks
in the relative similar ways. And you know what?
All the other tablets have to follow the iPad pricing as well.
We are relative, comparative creatures. We're looking at price in relative way,
it's very hard for any product to come up outside of this, of this comparison.
The same thing, by the way, can be said about the internet, more generally.
When the internet started, we called this internet zero point zero, there was a
logic. And the logic was, let's give everything
for free. And if we give everything for free people
would come and, come and, come and, come in masses and that was true.
And then they said and once people come in masses and use our services they will get
used to it and will want to use it and they'll be willing to pay 19.95 for that.
That was not so true because when we experience, experience something we might
value it. But not necessarily be willing to pay for
it. And because of that, by the way, we move
to this internet as being an advertising platform rather than a platform that
people pay for it. And the point here, the point I want you
to think about is that once we make initia, initial decisions.
Other decisions follow. The way we train people to think initially
is most likely going to be the way that they're going to make decisions later on.
It also suggests that when we introduce a new product we have a tremendous latitude
in how we want people to think about how we can price it.
But once we've introduce it and people got used to thinking about in a certain way,
it's really hard to escape that comparison point.